Marketing Budgets and Metrics
Marketing isn’t usually comfortable speaking Money. But being able to prove monetary worth in a corporation ensures gold will rain down upon your head. Okay, maybe that’s a bit much. But credibility and a seat at the leadership table will certainly be more likely. In this article I’ll cover Marketing Budgets (planning for how much a marketing initiative will cost), Marketing Metrics (determining, after implementation, how effectively you spent that money), and tips for communicating more effectively with the people who speak Money as their first language.
Part 1: Marketing Budgets
Where to Start: Four Methods for Setting Budgets One of the most common questions marketers and business owners ask is, “How much should I spend on marketing?” It depends on many factors, including:
- Your industry. (Some industries like cereal manufacturing invest heavily in marketing! Learn what companies in your industry are spending on their marketing. Consult industry publications, trade associations, and contacts you have in the industry for details.
- Your competitors’ spending. (This information is harder to come by, but it can still be found. Official company documents, like annual reports, might tip you off. Or you might be able to piece together some estimates by observing their marketing initiatives: how many ads did they place in a certain publication and what size, what level of sponsorship did they provide for an event, etc.)
- The development stage your company is in. (If you’re just starting out, expect to spend a higher percentage of gross revenues on marketing. That’s because you’re busy building awareness for your company. A more established business, with stronger industry awareness and word-of-mouth, will usually spend less on marketing.)
Here are the four specific ways that businesses set their budgets:
1) What’s in the Checkbook Method
Many small businesses set their marketing budgets at what they think the company can afford. Basically, a business owner consults with his or her accountants and asks how much he or she can afford to spend on marketing. This method of setting budgets does not require a lot of thought and completely ignores the role of marketing and promotion as an investment on sales volume. It also makes long range market planning very difficult to accomplish.
2) Percentage-of-Sales Method
This is one of the most popular methods of budgeting for marketing expenses. Small businesses allocate a specified percentage of sales (either current or anticipated) for their marketing budgets. For example, a retailer had sales of $500,000 for the year might allocate a fixed marketing budget at 2.5% of sales. After simple calculation, 2.5% of $500,000 is $12,500.
There are a number of advantages to this method of calculating a marketing budget. First, a percentage-of-sales method means that the marketing budget will vary with the sales. This will satisfy the accountants or your financial officer because they would like expenses to bear a close relationship to the direction of corporate sales.
Calculate projected sales and set aside a percentage of the told figure for marketing expenses, keeping in mind that 3 percent of sales is an average figure for advertising and promotional costs alone. Higher percentage allowances generally produce greater results if dollars are wisely used. The marketing fund must also cover general administrative expenses, travel, supplies, postage, resource development training, sales force expenses, marketing research, subscriptions, and professional memberships. Although the budget must be flexible enough to allow for miscellaneous expenditures, it is necessary to live as closely as possible within the confines of the predetermined allowance.
3) Keep up with the Joneses Method
Some companies set their marketing budgets to achieve “share of voice” parity with their competition. Basically, this means that one merchant finds out how much the competition is spending on marketing and then spends the same. There are two sides to this story. On the positive, maintaining relative parity will prevent promotion wars in the marketplace. On the negative side, this method assumes that the competition knows what they are doing-which may or may not be true.
4) The Objective-Task Method
This method is most often considered as the best budgeting method. The budgeting process under this method begins with objectives or “what do we want to accomplish” principals. The budget is developed by costing out the expenditures necessary to achieve the desired sales objectives. Although this budgeting is very realistic as to the growth and communications needs of a company, it is often limited by the ceiling set by management. The tactics that a company may deem necessary to achieve the growth objectives may exceed the monies set aside by management for a given year. Nonetheless, this method will prove to be the most logical for any marketing or promotional budgeting.
It is important to note that preparing marketing and promotional budgets should not be treated lightly. At the beginning of the planning stages, tobacco retailers should be clear on what their sales and revenue growth objectives are for the coming year(s) and be prepared to stay on course to achieve those objectives. Deviating from the plan will drastically alter expected results and any evaluation of the effectiveness of the plan will be very difficult and make it hard to justify the annual expenditures.
Part 2: Marketing Metrics
Consider a recent study by the CMO Council that found less than 20% of top technology marketers surveyed had developed “meaningful, comprehensive measures and metrics for their marketing organizations.” The last major study on marketing ROI found that 68% of marketers were unable to determine the ROI of their initiatives.
With all of the recent buzz over marketing ROI, the truth is, it is not necessarily the most appropriate metric for every marketing initiative. While determining marketing ROI is ideal for large initiatives and initiatives where it can be easily determined, such as direct mail or online marketing, it can be complex and cost prohibitive process to accurately determine marketing ROI on small offline branding campaigns. Don’t get me wrong, marketing ROI is the ideal measure, but it can be costly to properly implement. The majority of CFOs will agree and want to set thresholds for when marketing ROI is used as a measure of effectiveness.
Why Measuring Matters
Measuring alters the way you think. Using metrics you’ll start thinking in a more disciplined fashion by asking more detailed and strategic questions that follow a train of thought. And the answers you gain will spur you on, in turn, to expect greater things from your marketing.
Helps you identify trouble spots in your marketing, or the sales process that supports or follows your marketing.
For example, after analyzing your lead generation efforts, you may find your company getting lots of leads, but not closing many of them into sales. Is that because your prices are too high? Is there a significant difference between your product and your competitor’s product that prospects only find out about after they call you? The more you learn about what the weak links in the chain are, the better you can address them strategically and improve results.
Helps prove your worth. Helps you show that your marketing efforts are making progress and adding value to the company.
There is a strong correlation between marketing measurement practices, the corporate perception of marketing and the marketing budget. Firms that measured their results had marketing budget increases that were nearly twice the percentage of those that did not measure results. Companies that measured their marketing results increased their annual marketing budgets an average of 11.2% in 2004, while those companies that did not measure marketing results increased their budgets by 6%. (Source: Communications consultants Blackfriars Communications, Inc.)
The critical key is to outline your expectations up front and put in place a mechanism to track your results.
Show Me the Numbers: Three Keys to Getting Started
Don’t drown in data. Instead, start small with these three steps:
- Review your business model and objectives
- Keep your metrics simple
- Assign a unique identifier for every campaign
1) Review your business model and objectives
Consider taking a look at your organization’s business model to help you determine what to measure. Profits? Turnover? Customer loyalty? Also, what are your business objectives and goals? What is the particular goal of your advertising campaign? Define metrics to tie in with those, then before you gather data figure out how you want to track your campaigns and what you want to track. If you’re focusing on an online ad campaign, for example, you may want to track different types of leads and which leads result in sales. One way of tracking this data is to use one many software products or your customer relationship management (CRM) system to measure visits to certain pages and click-throughs. (Continue reading for tips on creating an identifier for your campaign.)
Once you have a clear method for collecting and measuring your data, you can see exactly how well a particular campaign or marketing tactic is working—and how well it ties into your overarching business goals.
A word of warning: Don’t let existing data guide you in creating metrics; instead, let specific outcomes guide what you want to measure.
2) Keep your metrics simple
It’s easy to get overwhelmed when looking at a mountain of data. Rather than trying to tackle the whole thing, start with KISS: “keep it simple, [pick your favorite s-word].” Choose one metric you’ve defined and work with that first. Continue adding metrics and validating data, and the data pile gets smaller and more manageable.If your organization relies on a customer relationship management system, you may want to create your own spreadsheet based on the data pulled from the CRM instead of trying to make something happen within the CRM. Or, your organization could be on the hunt for a CRM system. In this case, don’t expect the CRM to be a miracle cure. Too many organizations implement a CRM without researching both their own processes and how to find a CRM that best fits with those processes. So, try a simple database or spreadsheet and pick one or two things to measure. Grow from there. Perhaps, the database can begin with the identifier information mentioned below, so you can quickly find out which avenues are most successful in meeting your business objectives.
3) Use a unique identifier for every campaign
An excellent way to see which campaigns do well and which need help is by assigning each one an identifier so you know where the visitors come from. “When publishing any advertising that calls for a ‘call to action,’ you should always have specific contact information,” says Dawn Wiggan, consultant with Dawn-Bennett Cole, LLC. Wiggan gives an example of a call to action that takes a visitor to a company’s site. The visitor should land on a page that’s relevant and takes him or her to the landing page. When you run an ad in a local newspaper, use a link like www.company.com/news, so you can identify these visitors as those who saw your newspaper ads. When advertising in print, remember to keep the URL short because people have to enter it into their browsers.
With online campaigns, you don’t have to worry about short URLs. “To track where your responses are coming from, check your log files (there are a number of software programs that can gather that information and tabulate it for you, and they are usually bundled in with your web hosting service),” explains Wiggan.
Set up multiple toll-free phone numbers and use them like you do with the unique URLs. Each phone number can be associated with a specific ad. “Your service provider will be able to provide you with a report of activity for each phone number. In that way, you can track where your advertising is most effective,” she says. Collect and maintain the data in a database that includes the contact route (where the visitors found your ad) and watch for patterns. These help you identify where your ads are most and least effective.
What to Measure
The metrics you use don’t have to be complicated, just revealing. Every statistic that you spend valuable time compiling should act as a window into your marketing effort. Each metric should tell you something significant about your effort. Otherwise, what’s the point?
Two Common Metrics
1) New Inquiries (and Where they Originated From)
Inquiries (or leads) are the lifeblood of a company. Inquiries can turn into prospects, which in turn convert into customers. As your business grows, you’ll find your new business development efforts will crave new leads like a fire craves oxygen.
Ask: What are the ways inquiries come into your particular business? (Possible answers include calling and requesting a brochure, emailing with a question, sending in a reply card, stopping by a trade show booth, signing up for an e-newsletter, etc.)
Track inquiries on a monthly basis will help you pinpoint if there is any seasonality to your business and will give you time to react if there are dramatic changes.
The question you can’t afford to ignore: “How did you hear about us?”
2) New Customer Sales (and Total Revenue from Those New Customers)
In order for a company to grow, you must replace any customers that you lose through attrition AND bring additional new customers into the mix. That’s your primary objective as a marketer. You are seeking a steady stream of new customers.
To determine your true impact on the business, you need to know how many of the inquiries you converted to clients. To take it a step further, you could identify the revenue those new clients generated.
Here’s a sample of a report Jay Lipe (Marketing Toolkit for Growing Businesses) recommends:
New Customer Sales Report:
|XYZ Inc.||$300,000||Yellow Pages|
|ABC Co.||$240,000||Referral-Trade Assn.|
|Climb On Inc.||$174,000||Yellow Pages|
|On Belay Inc.||$124,000||Referral – ABC Co.|
Define a new customer as one who has 24 months or less of revenue history with you, and then generate a quick report showing your new customers, ranked by sales — high to low, and where they came from.
Prepare this report every January for the preceding year and you may begin to notice a pattern around where new customers are coming from, and what attracts them to your doorstep. Using this example, what preliminary conclusions could you draw?
The OTHER Measure
Another important set of measures you’ll use are efficiency metrics. These measures are used to evaluate the actual spending efficiencies behind your marketing efforts. How well is your marketing money being spent? Spending more does not always give you better results. For example, placing advertisements is one of the more expensive marketing tactics you can pursue. Does it generate as many leads for you as accepting public speaking engagements, which you can usually do without incurring any expenses at all? And if you advertise in the Yellow Pages, an industry trade magazine and on online directory – you need to know which source brings you the greatest number of leads and at what cost.
Cost Per Inquiry (CPI)
This is sometimes called cost per lead, and is a simple metric that is extremely valuable in pointing out which marketing programs work hardest for you.
Total Marketing Expenses for a Program: $2,000
Divided by Total Inquiries: 10
Equals Cost per Inquiry (CPI): $200
Cost Per Order (CPO)
A related measure is Cost Per Order. While CPI is a measure of your spending efficiency to obtain inquiries, CPO measures your efficiency in closing orders. CPO is always higher than CPI because you’ll always have more inquiries than orders. But if your CPO is significantly higher than your CPI (say, 10 or more times higher), that may indicate that your weakness is in converting inquiries into orders (for example, your sales force needs training or you lack sales collateral)
Part 3: Speaking Money
Marketers are typically very good at developing a plan, as in step one above, especially when it comes to detailing the expenses. But to deliver what CFOs and CEOs require, we also need to deliver on the remaining four actions. This means that marketers who traditionally exercise the right, creative sides of their brains now have to start getting the synapses firing on the left side. Below are four key steps to improving your ability to deliver measurable results in a way that even your CFO will approve.
Step 1: Determine the definition of success and how you will measure whether you have succeeded or not.
Think of defining and measuring success by answering these five questions:
- How you will define success in each of the relevant areas?
- What are the numbers that you will need to collect?
- How will you collect them?
- How accurately will you collect them?
- How often will you collect them?
CFOs and CEOs already spend a lot of the company’s resources on the collection of data. They are used to investing in measurement systems and are able to understand the results if the metrics and measurements are properly in place.
Unfortunately for marketers, most of that data has to do with the collection of financial data or production data. But if the CFO can have a great accounting system, why can’t the marketing department have the same systematization to measure its effectiveness?
Step 2: Align your marketing spend to marketing objectives.
Determine your short-term and long-term marketing goals in terms that your CFO and CEO like to hear—numbers! To win the hearts and minds of your internal customers, your marketing budget must have not only the expense side but also specific objectives tied to them. Lastly, they must be broken down into specific components that they can easily identify with.
- Marketing to existing customers. Marketing to existing customers is important to keep them loyal (reduce churn) and to up-sell or cross-sell to them.
- Marketing for new customer acquisition. Most marketers fail to separate out new customer acquisition marketing from each of the other four marketing types. In a growth business, new customer acquisition is critical to achieving that growth. In a high-churn business, such as wireless phone service, new customer acquisition must exceed the amount of churn in order to deliver revenue growth.
- Marketing to increase brand and pre-purchase aspects of the purchase funnel. Marketing cannot be responsible for just delivering short-term revenue objectives. It must also deliver long-term revenue opportunities in the form of increased brand awareness, brand consideration and purchase intent. Depending on how you define your purchase funnel, marketing can deliver increases at each level of the purchase funnel as an investment in the delivery of future sales.
Step 3: Develop a feedback mechanism to help you improve marketing operations based on learnings and results from steps 1 and 2.
We’ve also found that marketers who can prove their results typically earn more than marketers who can’t. The investment in the improvement of marketing effectiveness can have a huge impact both on the position of the company and on the position of your career.
Step 4: Step four is the simplest step of all but must come before all the others. Get started!
When speaking Money to top management it is critical to use metrics that matter to them. In the 1970s, the Polish government set out to make its furniture industry more competitive in the global economy. To that end, the government rewarded furniture factories based on the total weight of their products manufactured. As a result, the citizens of Poland now have the world’s heaviest furniture, according to a March 4, 1999 article in the New York Times.
Of course, Polish officials didn’t intend to produce heavy pieces of furniture; they wanted to increase production. Yet, as this example reveals, performance metrics can’t produce their intended outcomes if they don’t measure what really matters to the business.
As a marketer, you have no shortage of metrics at your disposal—including brand awareness, customer satisfaction, and ad readership, to name just a few. However, your CEO and CFO, as well as your firm’s shareholders, care less about these metrics than they do about others—particularly cash flow—and though these metrics are generally not part of the marketing vocabulary, they should be. They enable you to tell the story of how marketing contributes to your firm’s performance. Use the wrong metrics to communicate marketing’s value, and you risk producing a lot of heavy furniture. Remember to keep these things in mind:
W.I.I.F.T. What’s in it for them? Use the same skill you have for connecting with external clients to reach out to your internal clients. Speak to them in their language – always come back to objectives and results. Always under-promise and over-deliver. Professionals in marketing have an optimistic mindset. They think big, aim big. Modify your target if need be to ensure you hit it. Accountants operate from a more pessimistic outlook. (They call it realism!)
Communicate Promptly and Regularly. If you coordinated or attended a tradeshow, share the results shortly after it wraps up. Don’t wait three months. The business owner and accountant are seeing the expenses going out – don’t delay in showing them the results.
Provide quarterly updates along the way. And when year-end hits, put together a recap of the year. Remind the organization of all of the things you’ve done and what it has accomplished. Keep these RESULTS top of mind (yours and theirs) as you’re putting together a budget for the year to come. Studies show that marketers who can prove their results typically earn more than marketers who can’t. The investment in the improvement of marketing effectiveness can have a huge impact both on the position of the company and on the position of your career.
One of the best ways to gain a macro view of your business is through SG&A Reporting.
If you’re looking for a trustworthy bookkeeper or accountant, contact us today to learn how Owl can help you.
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